Government accounting reform, fiscal transparency, and local government debts: Evidence from China

Abstract

Government debt is fundamentally influenced by the specific institutional context in which it operates. The recent Government Accounting Reform (the Reform) in China is posited to enhance the quantification and reporting of local government debts (LGDs), serving as a critical mechanism to mitigate fiscal crises. LGDs in China are composed of explicit debt and implicit debt. The article primarily investigates explicit debt, which is further divided into existing debt and incremental debt. Utilizing a dataset sourced from the Ministry of Finance in China, our study reveals that the scale of explicit debt has increased following the Reform. Moreover, the Reform exerts distinct disclosure and constraint effects on existing and incremental debts. Specifically, the Reform has effectively influenced the scale of LGDs by fostering greater fiscal transparency. Additionally, it has been observed to reduce government borrowing costs. These effects are particularly pronounced in regions characterized by higher deficits or lower transparency. The implications of the Reform are significant for the risk management of LGDs, underscoring its broader relevance in the fiscal landscape.